Funding Stormwater Management

By Jessica Cook and Mark Ruff

Crises always attract more attention and more funding than the everyday work of local governments, especially with one of our most valued natural resources: water. Images of the hazards involving water resources—such as floods and polluted streams—are often seared into our memories.

But most of the work that cities do to help preserve our water quality and mitigate flooding is part of the invisible workings of government. This is the paradox of stormwater management: the better we do it, the less our citizens know about it, and the more hesitant they are to pay for its gradually increasing costs.

New regulations and our own increasing sensitivity to the environment demand more improvements to stormwater systems (also called “surface water”). Finding a stormwater funding strategy that can sustain public support in your community is critical.

The first step in choosing a funding option is to develop a five- to 10-year capital plan for stormwater. The staff and council can then evaluate how to pay for the project. Depending on the city’s finances, leaders can operate on a “pay-as-you-go” basis or use general obligation bonds.

There are two primary ways to fund operations and maintenance of a city’s stormwater system: user fees and property taxes.

User fees The most common type of user fee is a stormwater utility fee that is charged to all property owners, including tax-exempt properties. The council can choose how to allocate the cost burden. Some cities have different zones aligned with drainage systems, and charge differing stormwater fees in each zone. More commonly, cities opt for ease of administration with one rate structure.

Special assessments are another way to fund projects by linking specific stormwater improvements to benefiting properties. These are often used for stormwater projects completed in conjunction with road reconstruction projects. Special assessments, however, are not as effective for larger improvements, such as a regional stormwater pond in developed areas, nor are they used very often for the maintenance of stormwater systems.

Development fees are also a source of revenue for capital improvements to systems. New development places demands on existing infrastructure, and requires new ponds and pipes. Most cities collect a stormwater charge when land is platted, and credits can be given for on-site holding ponds and outlets.

Many developers prefer to install improvements and contribute them to the city in lieu of paying fees, but a word of caution is in order here. On average, about 50 percent of the stormwater impacts of a new development can be mitigated on-site. New development will necessitate off-site improvements now or in the future. Cities should collect some revenue from development to fund off-site projects.

The City of Chanhassen (population 23,000) provides a 50 percent credit to its water quality fee for on-site ponding, and also provides a credit for each on-site outlet constructed by the developer. “Our fee system incents developers to manage stormwater on-site but also recognizes that, when the ground is frozen or in heavy rains, the developer will be impacting the regional system,” says Terry Jeffery, water resources coordinator for the City of Chanhassen.

Property taxes Using property taxes is historically the more common way to fund stormwater management, and is still used for most water¬shed districts in the state. But pressure on general funds has led many cities to move to a stormwater utility rather than funding stormwater costs with the general levy.

Taxes from the special districts are used solely to pay off bonds that finance the project. When the bonds are paid in full, the district is closed. These special districts are more administratively burdensome.

Another form of special taxing district is tax abatement. In tax abatement, each taxing jurisdiction, following a public hearing, can opt to abate the taxes of specified properties in order to pay for public improvements such as stormwater. The infrastructure does not need to be on or adjacent to the abated parcel(s). Tax abatement functions like a general fund levy in that the amount of the abatement must be added to the total levy for each year of the abatement; however, it has historically been a special levy outside of levy limits. The abated properties continue to pay full property taxes.

The City of Robbinsdale (population 14,000) uses its storm¬water utility to pay for both operations and capital costs. “We believe that every property contributes and everyone benefits from having good water quality in our lakes and creeks,” says Robbinsdale City Engineer Richard McCoy, “and a properly designed and maintained storm sewer system that prevents nuisance flooding.”

Jessica Cook is financial specialist, and Mark Ruff is senior financial advisor/principal with Ehlers (www.ehlers-inc.com). Ehlers is a member of the League’s Business Leadership Council (www.lmc.org/sponsors).